Interviewer: Where does the tech sector fit in global equities portfolios right now? Are we seeing the end of the dominance of that sector or is it a pause?
Pendal portfolio manager Nudgem Richyal: Back in 2008-09 when we started the Global Select Fund product at J O Hambro, we went out saying tech looks like it’s going to be a leading sector for the foreseeable future.
At the time one of the major asset management houses was actually closing their dedicated tech fund. It’s usually a sign that something’s about to turn.
Obviously it’s been a while since then and the question that comes to mind is have we come to the end of the tech cycle?
We think it’s still open for question.
Clearly January has not been generous to tech. That’s understandable anytime you go down the road of a potential rate hike cycle because technology – and to some extent biotech and pharma as well – are seen as long-duration stocks.
And so the Net Present Value is hostage to the discount rate. As the market starts to worry about the discount rate rising, the tech sector is highly sensitive to that.
And so right now we’re in this moment where the market has decided to worry about a rate hike cycle, and that’s not a great place for tech.
Then within that [tech sector] you have stratification – what we would call the concept stocks, the stuff with very little revenue or no revenue and it’s all about the Terminal Value (a company’s value judged beyond foreseeable forecasts).
They’re the most at risk and you’ve seen that as you’ve seen huge decreases in market cap.
Look at the electric vehicles companies – especially ones that went public via the “de-SPAC” route (a merger with a publicly traded special purpose acquisition company). They have lost a lot of market cap in the last few weeks.
The market right now sees that rates are going up – and these are long-duration stocks, and therefore we need to really take an axe to the Terminal Value.
Interviewer: So there’s plenty of money looking for opportunities and these longer duration stocks are less attractive on a valuation sense. Where would you be looking to put that money?
Nudgem Richyal: I’d answer that in two steps.
One, you want to sharpen your pencil because there might be some early birthday presents through this year, as my co-manager Chris Lees would say.
Some of these stocks actually have pretty good business models and maybe the valuation just got a little bit overextended.
This will be a healthy correction for those type of names.
Who wouldn’t have loved to have bought Amazon in 2002? Who wouldn’t have loved to have bought Netflix in 2009? You’ll get those kind of opportunities within this space.
That’s one way we are looking at it.
The other way is we think it’s too early to bet on a complete regime shift.
Why do I say that?
At the moment the commentary seems to be hawkish. There’s been this idea for a long time that the Fed put protects the equity market on the downside.
But we haven’t even had a rate hike yet.
So it it’s just too early to decide whether there will be a real wholesale regime shift.
So look at it as being able to pick up some early birthday presents through this year.
The other thing to bear in mind is value rallies tend to be short lived.
So if you look at the other side, which are the short-duration stocks and how do they fare in this type of market environment?
Generally they tend to do well, but it doesn’t last that long.
So that becomes a market timing issue.
Then the last thing is – if growth starts to slow, is there really going to be much longevity to the rate hike cycle?
Interviewer: With all that in mind, if I have got money to invest, where should I be putting it? How should I be thinking right now, given the volatility and the economic prognosis that we have in front of us? What should I be looking for?
Nudgem Richyal: We’re looking for good fundamentals at the right valuation and prices which are in an up-trend.
So when it comes to any particular stock, sector or geography, those are three things we’re really keen on.
What are the fundamentals like? What are you paying for them from a valuation perspective? And is the share price headed north?
Because we want to buy something that’s going up, which carries on going up.
So we’ll carry on focusing on those type of companies. We’ll carry on focusing on those neighborhoods and in those geographies.
Pendal Global Select Fund
Something very different in global equities
Interviewer: How many stocks do you and [Pendal Global Select Fund co-manager] Chris Lees look at in a year?
Nudgem Richyal: It really varies. This year I think we are going to be looking at more than our usual number of stocks because the dislocation is going to throw up a lot of opportunities.
Periods like this I’ll start going through all the recent IPOs of the last two years. Because some of them will become orphaned.
Back in 2009-10, we picked up [global investment firm] KKR in our fund because they had done some very interesting corporate restructuring. And actually then we picked up two of the companies they themselves IPOed – XP and Avago, which went on to do really, really well.
This year we’ll be probably looking at more than two-to-three names each per week, just because we are going through what came to market in the last couple of years and what spun off.
Often what you see in market dislocations is crown jewels sometimes spun off – for reasons of shoring up the balance sheet… Just because that’s what the bank has encouraged the corporates to do.
Then the other thing is obviously we’ve had this whole de-SPAC situation.
So I think this year we’ll be looking at a lot more companies than usual.
Usually I’d say between Chris and myself it’s just one stock each a month. It’s a very low maintenance management of the product. And we run an equally weighted portfolio as well because we’ve got good conviction in the names that are in there.
That makes it very straightforward. If you look at the product at any point in time, you can see those companies that are doing well, but equally you can see those that are not doing so well.
So if we feel there’s any ambiguity in the names that aren’t doing so well, we can always shoot first, ask questions later.
But I’m just contrasting that with what I think is going to be – or is already – the reality of this year. Given the dislocation, we’ll be doing a little bit more than our usual operating maintenance on the product and portfolio.
Interviewer: That was Nudgem Richyal, senior fund manager at Pendal and J O Hambro Capital Management.
You have been listening to The Point podcast from Pendal. I’m Sean Aylmer.
Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.
Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.
Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).
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